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BT Q2 results, better outlook, huge pension deficit.
BT’s second quarter results showed the expected declines, but (adjusted) profits rose and expectations for the full year are now substantially better, but some big problems remain.
The main trends are long established, declines in older businesses, such as lines and calls, partially offset by growth in broadband and services.
The biggest, and insoluble, problem is visible in the KPI numbers: more and more lines are being unbundled. There are more BT lines (run by BT Openreach, which is operated at arms length), but fewer that are being used by BT. BT does get some revenue from each unbundled line, but far less than it does from its own lines.
The most important news was that lower revenue declines and cost-cutting have combined to make the the outloook for the full year substantially better. Cost reductions that are better than expected are the main driver of an improvement in the expected free cash flow to £1.6bn: BT has previously expected around £1bn, and last year’s was £1.1bn.
The dividend is only expected to be slightly higher, so at the current price of 149p, the yield will only improve slightly to 4.5%. There are plenty of higher yield shares about.
The biggest problem is the pension deficit, now over £9bn, and is the reason why BT trades on such a low PE: it effectively has a huge and fluctuating debt. Ofcom is considering whether to let Openreach pass on its share of pension costs, this will help, but it will only relieve BT of that portion of the pension deficit, and much of the passed on costs will go to other parts of BT, that are still Openreach’s biggest customers.
In the meantime, pension deficit payments of £525m this year will drain off nearly a third of free cash flow, so the real free cash flow (real means it belongs to shareholders), will be more like £1.1bn
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